British Land: flight to quality boosts lettings as workers return to offices

Stop raiding the fridge and get back to the workplace, says Boris Johnson. The UK prime minister is not alone in fretting about office occupancy rates, which are about a quarter of pre-pandemic levels. British Land is undaunted. The FTSE 100 property company has published solid annual results, featuring a 12.2 per cent rise in net tangible assets and the highest volume of lettings in 10 years.

That conflicts with pessimistic visions of downsized post-pandemic workplaces. But a trend is emerging for full office attendance from Tuesday to Thursday. Moreover, British Land focuses on defensive prime sites.

The group expects rents to rise at office campuses such as the City’s Broadgate, albeit modestly. Top-quality offices are in short supply, with a vacancy rate of 4 per cent, compared with 10 per cent for grottier buildings. Helped by a small decline in valuation yields, the value of the campuses, which are nearly two-thirds of British Land’s portfolio, rose 5.4 per cent.

Like Land Securities, which swung back into profit on Tuesday, British Land trades at a hefty discount of nearly 30 per cent to net tangible assets. The dividend yield is about 4 per cent. That does not necessarily signal good value. Property share prices tend to be weakly linked to such accounting measures.

Lex chart showing central London office projects completed or under construction

But one source of encouragement to investors is British Land’s expectation that it will reap £2bn in profits from its pipeline. That takes account of construction cost inflation, which could reach 10 per cent this year. British Land expects that to halve over the next 18 months.

Lex chart showing British Land share price against the FTSE 100 index

Investors should ponder how inflation affects British Land’s prospects. It is debatable whether real estate companies are inflation hedges. They can raise rents. But valuations might then fall as yields mirror rising interest rates.

Investors have been increasing their allocations to UK real estate as they rotate out of bonds. For now, at least, that is a source of support for the sector. Good news, if hardly an incitement for office parties of the kind sometimes attended by the PM.

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